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China Faces Deflation Dilemma: Urgent Policy Action Needed to Revive Economic Sentiment and Demand

In January, the consumer price index (CPI) in China fell by 0.8% compared to the previous year, as reported by the National Bureau of Statistics on Thursday. This decline, the most significant since September 2009, was more pronounced than economists had anticipated, who were expecting a 0.5% decrease.

The producer price index (PPI) also saw a decrease, dropping by 2.5%, which was slightly better than the forecasted 2.6% decline. This marks the 16th consecutive month of deflation.

The core CPI, which excludes the volatile food and energy sectors, increased by a mere 0.4%, showing a slowdown from December and representing the weakest growth since June of the previous year. A significant factor in this slowdown was a 17% drop in pork prices, contributing to a record 5.9% fall in food prices, the largest since data collection began in 1994.

Our Take: While the deflation observed in the Producer Price Index (PPI) may not be unusual when considering the broader PPI cycle, the continuous decline in consumer price inflation could become a significant concern for policymakers if it persists. Therefore, we believe it's only a matter of time before we witness more assertive policy measures aimed at boosting sentiment and enhancing domestic demand. The timing of such actions—whether they will be implemented before the National People's Congress or afterwards—remains a matter for debate, but it is clear that we are approaching a point where intervention is becoming increasingly likely.


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